Radian Group Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: Radian Group, (RDN)

Radian Group (NYSE:RDN)

Q4 2012 Earnings Call

February 11, 2013 10:00 am ET

Executives

Emily Riley

Sanford A. Ibrahim - Chief Executive Officer and Director

C. Robert Quint - Chief Financial Officer and Executive Vice President

Teresa Bryce Bazemore - President of Radian Guaranty Inc

H. Scott Theobald - Executive Vice President and Chief Risk Officer of Radian Guaranty

Analysts

Douglas Harter - Crédit Suisse AG, Research Division

Craig Perry

Steve Stelmach - FBR Capital Markets & Co., Research Division

Jasper Burch - Macquarie Research

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

Jack Micenko - Susquehanna Financial Group, LLLP, Research Division

Matthew Dodson

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Operator

Ladies and gentlemen, thank you very much for standing by. Welcome to today's Radian Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded, and I would now like to turn the conference over to our host today, Emily Riley, Vice President of Financial Communications. Please go ahead, ma'am.

Emily Riley

Thank you, and welcome to Radian's fourth quarter 2012 conference call. Our press release, which contains Radian's financial results for the quarter, was issued earlier today, and is posted to the Investors section of our website at www.radian.biz.

During today's call, you will hear from S.A. Ibrahim, Radian's Chief Executive Officer; and Bob Quint, Chief Financial Officer. Also on hand for the Q&A portion of the call are Teresa Bryce Bazemore, President of Radian Guaranty; David Beidler, President of Radian Asset Assurance; Scott Theobald, Executive Vice President and Chief Risk Officer of Radian Guaranty; and Derek Brummer, Chief Risk Officer and General Counsel of Radian Asset.

Before we begin, I would like to remind you that comments made during this call will include forward-looking statements. These statements are based on current expectations, estimates, projections and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially. For a discussion of these risks, please review the cautionary statements regarding forward-looking statements, included in our earnings release, and the risk factors included in our 2011 Form 10-K, as well as subsequent quarterly and other reports and registration statements filed with the SEC. These are also available on our website.

Now I would like to turn the call over to S.A.

Sanford A. Ibrahim

Thank you, Emily. Thanks to all for joining us and for your interest in Radian. Today, I will first provide a few highlights from our fourth quarter and full-year 2012 results then I will focus my comments on the priorities we set for 2012.

First, how we, at Radian, continue to grow our mortgage insurance franchise and capture a larger amount of new high-quality business. Second, what we're doing to mitigate our mortgage insurance legacy losses. Third, how we are reducing our risk exposure in financial guaranty to provide an important capital support to the mortgage insurance business. And fourth, how we are positioning Radian for success as the housing market recovers and for a return to MI operating profitability this year.

Bob will then cover the details of our financial position, and I will provide a few closing comments before we open the call to your questions.

Earlier today, we reported a net loss for the fourth quarter 2012 of $177 million or $1.34 per diluted share. For the full-year, the net loss was $452 million or $3.41 per diluted share. At December 31, 2012, our book value per share was $5.51.

The fourth quarter net loss was driven in part by an increase to our IBNR, a component of our large reserve that consists primarily of estimated denial reinstatements. Bob will discuss this impact to our incurred losses in more detail.

It is also important to note that the typical seasonal default and cure patterns that we mentioned in our third quarter call, as an expectation for the fourth quarter, did not materialize, which is a positive indicator of our improving portfolio.

Additionally, in January, new defaults were down 28% from January 2012; and cures were 109% of our new defaults. The January 2013 new default rate was the lowest monthly rate we have seen since December 2005.

Radian Guaranty's risk-to-capital ratio was 20.8:1 at year-end 2012, reflecting an improvement from 21.5:1 at year-end 2011. And importantly, we now expect Radian Guaranty to remain below 25:1 throughout 2013. This will include, if necessary, contributions from currently available Holding Company funds.

Now, let me turn to the topics that we believe are top of mind. First, we continue to write more new high-quality mortgage insurance business that can generate strong returns. We wrote $11.7 billion in new business for the fourth quarter, and $37.1 billion for 2012. We wrote an increasing volume of new MI business each consecutive quarter in 2012 and ended the year with more than double the amount of new business than 2011.

And we continued our momentum in January with our second largest NIW month in the past 5 years of $4 billion, which compares to only $2 billion written in January 2011. We look forward to continued strong volume this year, and we expect our total NIW in 2013 to surpass our 2012 volume.

From 2009 to the end of this January, we wrote a total of $85 billion of new business, creating an impressive earnings ramp that we expect will lead us towards future profitability.

Our sales strategy for bringing in business, both from existing and new customers, continues to be successful. In 2012, more than 325 new customers chose Radian as their MI partner, and those relationships mean new opportunity, as 21% of our mortgage insurance business in 2012 and 25% in January came from customers new to Radian within the last 2 years, with our pipeline of prospective new customers remaining very strong.

In the last 2 years, mortgage originations have been driven by high volumes of refinanced activity, and at some point in the near future, the market is expected to transition from refi to purchase. It is important to note that the MI penetration for purchased loans is significantly higher than it is for refi loans, and that purchases tend to be more skewed towards monthly versus single premium MI.

For the past 2 quarters, I have mentioned the outstanding teams at Radian that helped to drive our NIW success, which include sales and training. Today, I would like to mention a group that is working incredibly hard behind the scenes: our underwriters, operations and customer service teams that supported our outstanding, quarter-by-quarter NIW growth in 2012. They help make it even easier to do business with Radian, which is key to our success.

In 2012, our customer care team fielded 50% more calls than they did in 2011. Our service center underwriters were busy processing 125% more applications in 2012 than in 2011, and our customers were able to quickly and easily access Radian's rates using their Android, iPhone or iPad.

The 3 new members of our sales team announced last week is another example of our continued confidence and commitment to an ongoing investment in our franchise, which will continue in 2013.

Now turning back to our mortgage insurance book of business in Slide 19 on our webcast presentation, it is important to note that as of the fourth quarter, the 2009 to 2012 books grew to nearly 45% of our primary risk in force, and the most problematic 2006 and 2007 books are now down to under 26%. We continue to expect that, given the volume of new business we write each quarter, by the second quarter of this year, our book of business written after 2008 will be larger than the book written in 2008 and prior.

And the latest HARP program continues to improve the credit profile of our legacy book. More than 9% of our risk in force has completed the HARP refinance, and this, combined with our newer quality book of business, represents a strong portfolio that is now larger than our legacy book, representing 54% of our total primary mortgage insurance risk in force.

This improved composition of our mortgage insurance portfolio is one of the primary drivers of our expected return to MI operating profitability this year. You can already see the increasing impact of this new business on Slide 18 on our webcast presentation, where the 2009 and subsequent vintages are clearly providing a larger, positive contribution to the overall book.

Additionally, our gross total primary insurance in force is now growing again, and increased from $126.2 billion at year-end 2011 to $140.4 billion at year-end 2012, resulting in our MI premiums earned, net of ceded reinsurance premiums, increasing from $681 million in 2011 to $702 million in 2012.

Second, we continue to focus on mitigating losses in our mortgage insurance portfolio. The improvement in our portfolio of defaulted loans continues, with a steady decline of 2% from the third quarter and 16% year-over-year, as you can see on Slide 22. And the default rate on our primary book fell further in the fourth quarter to 12.1%.

As we work through our legacy book of business, we maintained $3.1 billion in loss reserves, which represents more than 3x the claims we expect to pay this year. And our primary reserve for default increased in the fourth quarter to $29,510, our highest level ever, up from $26,007 at the end of 2011; and $23,374 at the end of 2010.

You will find the details of our rescission and denial activity on Slide 20 of our webcast presentation. These rates continue to remain elevated, as we review claims where errors in underwriting are common. We also continue to review each claim carefully to ensure that the servicing standards referenced in our master policy have been followed.

Our average total claims paid in 2012 was $48,700, down from $51,900 in 2011, in part due to our ongoing effort to curtail claim payments based on servicing negligence.

What is most important to remember is that we continue to pay appropriate claims, while enforcing our rights on poorly underwritten, fraudulent or negligently-serviced loans.

Third, our Financial Guaranty business continues to serve as an important and unique source of capital for Radian Guaranty. Our Financial Guaranty team in New York remains focused on surveilling our existing exposure and pursuing opportunities for commutations and risk reductions. We successfully reduced our net par exposure from a peak of $115 billion in June 2008 when Radian Asset stopped writing new business to $34 billion in the fourth quarter of 2012. This represents a decline of our total Financial Guaranty risk exposure of 71%, which includes several successes in 2012.

In January, we announced a transaction with Assured Guaranty that commuted a $13.8 billion reinsurance portfolio and ceded an additional $1.8 billion of public finance business. This added $100 million to Radian Guaranty's statutory capital in 2012.

In April, we significantly improved the credit profile of our Financial Guaranty book by commuting our entire CDO of ABS exposure and a significant portion of our riskiest trust exposure.

In May, Radian Asset released $55 million of contingency reserves with the approval of the New York Department of Financial Services.

In November, we agreed to the commutation of our remaining reinsurance risk from FGIC. This commutation was completed in January, and consisted of an $822 million reinsurance portfolio.

Through actions taken in 2012, we successfully reduced our public finance exposure by 56%, including nearly 90% of our exposure to Jefferson County, Alabama. Similarly, our structured finance exposure was reduced by 50%, including nearly half of our CDO book.

As you can see on Slide 30, our remaining $13.8 billion corporate CDO exposure matures over the next 4 years, with 35% maturing by the end of 2013.

Finally, last week, Radian Asset received regulatory approval to release another $61 million of contingency reverses, which will benefit Radian Guaranty's statutory capital position. While we had anticipated the reserve release and included it in our risk-to-capital projections for 2013, the amount released was slightly higher than we had projected.

Today, the total cumulative release of contingency reserves related to the direct book since 2008 now stands at $425 million. Also, since 2008, Radian Asset has paid Radian Guaranty a total of $384 million in dividends and expects to pay another dividend of approximately $35 million to Radian Guaranty this year.

As of February, approximately $230 million in contingency reserves remains to support Radian Asset's existing risks. This represents an opportunity over time to add to Radian Guaranty's statutory capital as the exposure is ultimately reduced and contingency reserves are released.

As of December 31, 2012, Radian Asset maintains statutory surplus of $1.1 billion.

Fourth, while some challenges and volatility still remain in the economy and in our legacy portfolio, there is now broad data from multiple sources, indicating a solid recovery in the housing market after many years of declines.

Based on our performance and trends, we continue to project a return to marginal level of MI operating profitability in 2013, and look forward to a return to more normalized profitability over the next couple of years.

Our industry continues to slowly but steadily rake in share from the FHA, which presents another opportunity to increase our new business volume.

Penetration for our industry has doubled over the past 2 years and increased nearly 2.5 points in 2012 alone.

Additionally, acting FHA Commissioner, Carol Galante, announced another price increase for the FHA, effective April 1, stating that the decision was designed, in part to, "continue encouraging the return of private capital to the housing market."

The FHA also decided to remove the benefit of cancellation from its coverage, which we feel is another competitive advantage for private mortgage insurance.

Meantime, on Capitol Hill, we continue to hear resounding support in Congress for a larger role for private capital, including private mortgage insurance in the future of housing finance. This theme echoed throughout the financial services committee hearings last week, where the role of FHA was questioned and its financial condition challenged. This sentiment, along with the FHA's recent actions, should help our industry continue to return to a more traditional and sustainable balance between government and private mortgage insurance.

Now, I would like to turn the call over to Bob for details of our financial position.

C. Robert Quint

Thanks, S.A. I'll be updating you on the P&L activity and trends for the fourth quarter of 2012, our capital and liquidity positions as of year-end 2012, and some expectations regarding 2013.

The MI provision for losses was $307 million this quarter, compared to $172 million last quarter and $333 million a year ago. The increase in incurred losses compared to the third quarter is due primarily to the increased trend of denial reinstatements that occurred this quarter.

Based on this experience, in the fourth quarter, we increased our IBNR reserve for future reinstatements. While the historical reinstatement rate for denials is clearly in the 50% range, as depicted on Slide 21 in the webcast slides, we have taken into account a very recent reinstatement activity and prudently increased the initial estimated denial reinstatement rate to approximately 60%. That initial 60% rate declined over a 12-month period, as the outstanding denials age and actual reinstatements occur. We will continue to monitor this rate closely in 2013.

The reinstatement rate remains at 60%. No further net adjustments to reserves would be necessary over time. If the rate were to rise unexpectedly to 75%, the impact to total loss reserve as of 12/31, would have been approximately $100 million.

The net increase for the total IBNR this quarter was $61 million, resulting in year-end figure of $323 million. You will see on Slide 11 that a large component of incurred losses this quarter were from the existing default line, which reflect the impact from both actual reinstatements, as well as the IBNR increases during the quarter, and the normal aging of delinquent loans.

The amount in our year-end balance sheet, representing future denials and rescissions, was $455 million. The composition of the new default line continues to be at least 75% repeat default, which we consider positive. And historically, repeat defaults have had a much lower claim incident than first time default.

In addition, defaulted loans moved to foreclosure at a stable rate throughout 2012 and loans submitted as claims were relatively low in the fourth quarter. Both of these items are critical to determining future paid losses.

For 2013, we continue to expect a much smaller incurred loss line, driven by an estimated decline in new defaults of approximately 24%, with no material expected changes to default composition or net roll rate expectation.

Paid claims in 2013 are estimated to be between $900 million and $1 billion.

The 2009 and subsequent vintages continued to be profitable, and are growing as a proportion of our total business as depicted on Slide 18. Radian has written a meaningful volume of single premium business over the past few years, as we have successfully marketed the product as a competitive product to FHA.

While discounted, such single premium business appears to be very profitable, with loss ratios in 2012 that are similar to those from monthly premium and other business written during the same time period.

Radian Guaranty's year-end risk-to-capital ratio is estimated to be 20.8:1, with $157 million of excess statutory surplus above our 25:1 risk-to-capital ratio.

The primary drivers of the changes in our risk-to-capital this quarter were the operating losses which reduced capital and the strong new insurance written which increased growth risk in force, offset by our external and intercompany reinsurance, both of which reduced net risk in force; and from additional statutory capital benefits, relating to unearned premiums and deferred taxes.

Radian Guaranty ended the year with $926 million of statutory capital compared to $843 million a year ago. For 2013, we expect our strong new insurance volumes will continue to increase Radian's growth and net risk in force. Statutory capital levels are expected to remain near current levels throughout 2013.

Fair value gains and losses were minimal this quarter, as collateral spread tightening was offset by the tightening of Radian's credit spread. Slide 9 depicts our current balance sheet fair value position, along with the expected net credit losses and recoveries of fair value to exposure.

Based on our projections regarding future credit loss payments and recoveries, we expect to add approximately $244 million or $1.82 to pretax book value over time, as the exposures mature or are otherwise eliminated. That number is derived by taking the net balance sheet liability of $185 million and adding the present value of credit loss recoveries of $59 million. Both of these numbers are shown on Slide 9.

Operating expenses this quarter were impacted by increases in our stock-based compensation expenses, which were $13.5 million for the quarter compared to $1.3 million in the fourth quarter of last year.

As of December 31, 2012, the valuation allowance against our deferred tax asset is approximately $990 million or $7.41 per share. We have 0 remaining admitted DTA for GAAP purposes, as the majority of our $20 million fourth quarter tax provision represented the write-off of our remaining asset due to our determination in the fourth quarter that there's an extremely low likelihood of a near-term IRS settlement.

The most likely next step is tax litigation, which would likely take several years for final resolution. We continue to believe that our full DTA will be realized in the future, and a realistic timeframe, when we can potentially reverse some or all of valuation allowance, is still expected to be sometime in 2015.

We will have approximately $257 million available at the Holding Company after the upcoming full repayment of our 2013 debt. After completion of the exchange and extension of most of our 2015 debt, we have $55 million remaining par maturing in June 2015 and $195 million of par maturing in 2017. In addition to the $450 million convertible debt, which matures in November 2017.

We anticipate using current Holding Company funds primarily to support the operating company and we'll make contributions, if necessary, to help ensure Radian's strong new business volume and market position, which is the key to Radian's return to profitability.

I'd now like to turn the call back over to S.A.

Sanford A. Ibrahim

Thank you, Bob. Before we turn to the operator, I would like to summarize 4 important points. First, we wrote more new MI business each consecutive quarter in 2012 and ended the year with $37.1 billion in NIW, a number we expect to surpass in 2013.

Second, since 2008, we reduced our Radian Asset risk exposure by 71%, while paying $384 million in dividends to Radian Guaranty and releasing $425 million in contingency reserves.

Our statutory surplus stands at $1.1 billion.

Third, at the end of fourth quarter, our risk-to-capital ratio was 20.8:1, and we do not expect to breach 25:1 in 2013.

Fourth, we successfully extended nearly 80% of our 2015 debt obligation to 2017, leaving a total of $55 million due in June 2015.

What continues to excite us at Radian is moving closer to realizing the promise of a profitable future that will be driven in part by the size and earnings power of the high-quality, new MI business we have written since 2008.

Our success in writing new business continues, driven by our strong customer relationships, our highly skilled and dedicated Radian team, and our competitive risk-to-capital ratio, as well as the support of our stakeholders.

Now, operator, I would like to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from the line of Douglas Harter with Crédit Suisse.

Douglas Harter - Crédit Suisse AG, Research Division

You guys disclosed the combined insurance ratio, that being -- risk-to-capital ratio, sorry, of being close to 30x. Can you just tell us what type of impact that has versus the 25:1 that you're referencing that you'll expect to stay under on the main insurance subsidiary?

C. Robert Quint

Doug, this is Bob. The only risk-to-capital ratio that matters for writing new business is Radian Guaranty's, which is 20.8:1, and that's the one we said would remain below 25:1 for 2013. The other MI insurance subsidiaries, combined risk-to-capital is that other number. And we wanted to disclose it to show it, but it really doesn't matter whatsoever for writing new business.

Douglas Harter - Crédit Suisse AG, Research Division

Great. And then, if you guys could talk about from a competitive standpoint, saw Arch Capital buying the PMI platform, and NMI getting approval to write new business. So I guess, how are you guys viewing the competitive landscape with those potential new entrants?

Sanford A. Ibrahim

Doug, let me answer that. First, we believe that the entry of such large amounts of new capital shows that a lot of people believe that the Mortgage Insurance business is going to be attractive and profitable going forward, which for us already in the business is good. Second, we believe that new capital coming in and the strengthening of the mortgage insurance industry will play well with Capitol Hill because it validates the mortgage insurance business model, with policy makers who are starting to deliberate the future of the housing finance industry. Third, the new entrants announced bring the number of participants in the mortgage insurance industry to the same number that existed prior to the downturn, and we have competed with that number in the past, the major difference being, we now will be competing with the same number of players from a stronger position in the market, particularly given the number of new customers that we have added in -- added to Radian, and are continuing to bring into Radian. And finally, the mortgage insurance market could increase in the future as the FHA pulls back, and as the housing market returns to more normal level, driven by more purchase than refi. So that is a comprehensive view of the new competition and the competitive environment.

Operator

Next, we will hear from the line of Craig Perry with Panning Capital.

Craig Perry

I just had a couple of quick questions. The first is just in relation to your commentary about making operating profitability this year. Is there any way you could help us understand kind of, seasonally, when you would expect that profit to occur? Based on my numbers and based on kind of the January number, it appear that Q1 would be a profitable quarter. The second question, somewhat related is, any update that you care to provide to the market about the actual profitability of the new business you've written? I'm looking at Slide 18, and I think, in the past it's sort of 15% ROEs, that seems extremely conservative relative to the performance of the portfolio you've written 2009 onward. I know your competitors, Genworth, kind of have used sort of a 20% plus figure. Maybe you could just provide some commentary there? And then third and lastly, Bob, could you just help us understand the deferred tax asset of almost $1 billion? Why is it that if you achieve operating profitability this year, you wouldn't be in a position to write that backup sooner. I just know from my experience with some of the regional banks that I think it's sort of 3 or 4 consecutive quarters of profitability are enough or sufficient to cause a write back of that asset. Could you just walk us through kind of what conditions have to be met to write that asset up?

C. Robert Quint

Okay, I'm glad you didn't have a fourth one. The -- okay, so as far as the first question, we've talked about the whole year achieving this marginal MI operating profitability. Certainly, the first quarter, from a seasonal standpoint, is typically our best quarter. We've gotten off to a very good start, as you can see from our January results. So we're on our way, for the first quarter. But we're really talking throughout the whole year. And as we saw the fourth quarter, which is typically, from a seasonal standpoint, the worst from a new default and cure standpoint, really wasn't that way. So that's a reflection of our changing composition and our better book of business. Your second question regarding the vintages, the 15% ROE, which is really, a modeled ROE that we use over a cycle, clearly, it appears that the 2009 and subsequent vintages from what we can see so far, will be better than that, perhaps significantly better than that. It does look like 2010 is better than 2009, and 2011 is better than that. So these books can very conceivably end up being north of 20%, perhaps significantly. The 15% that we use is really over time, over a cycle. And the third question, regarding the DTA, that's still -- the 2015 is still our expectation. There are a variety of tests that you need to go through. There are cumulative income or cumulative loss tests that need to be observed, as well as a return to profitability. So there's no hard, fast, exact rule. But based on what we can see, just a return to profitability in 2013, or even 2014, won't necessarily get to the point where we can book reversal to the valuation allowance. We'll keep updating this but at this point, some or all of the reversal in 2015 appears the most realistic.

Craig Perry

Got it, okay. But it is conceivable that it could happen sooner as well depending on how things develop?

C. Robert Quint

It's conceivable but we would not expect it at this point.

Operator

Next we will hear from the line of Steve Stelmach with FBR.

Steve Stelmach - FBR Capital Markets & Co., Research Division

S.A, you noted that in 2012, the book has finally started to grow again. Yet premium revenues were down in '12. When can we start to expect to see Premium revenue on an annual basis start to grow similarly as the book is?

Sanford A. Ibrahim

You mean proportional to the book growth?

Steve Stelmach - FBR Capital Markets & Co., Research Division

Yes, or just growth at all. I mean, I know there may be some sort of a lagging component also the single premium component was a higher percentage overall mix historically than it's likely to be going forward to the purchase commentary you gave. But should we start to see total premiums begin to grow year-over-year at this point?

Sanford A. Ibrahim

Yes, yes. You should expect to see that. Obviously, you also need to factor in the numbers that we showed and I referenced, the impact of reinsurance.

Steve Stelmach - FBR Capital Markets & Co., Research Division

Yes. And then just sort of dovetailing into that, you mentioned staying below 25:1 risk-to-cap in '13. Presumably, the world is a better place in '14 and '15, why can't we expect to sort of stay below 25:1 for the foreseeable future at this point?

C. Robert Quint

Yes, I think what we're looking at is for the next year, we expect to stay below. We're writing significant volumes and we think over time, the mortgage origination market is going to come back strong, the purchase market is going to come back. So it could be that the volumes of new insurance written drive the risk in force significantly higher. So that's why we're really not commenting on beyond 2013, but it's important to know that for 2013, we expect to stay below, and that will allow us to keep writing.

Steve Stelmach - FBR Capital Markets & Co., Research Division

Okay, great. And then just lastly, on Page 18, is that call it $256 million roughly of sort of 2009 and more recent premiums earned. What percentage of that was single premiums? And what's more of the monthlies with annuity type aspect?

C. Robert Quint

I don't have the exact numbers. Most of it was monthlies. So for the past couple of years, we've written -- this year, we wrote about 1/3 in singles. Now that's going to be more in the premiums written as a component than it is beyond. So it's still mostly monthlies that make up the premiums earned.

Operator

We'll go next to the line of Jasper Burch with Macquarie.

Jasper Burch - Macquarie Research

I guess, starting off with on the 2013 profitability guidance, could you give us a little bit more color in terms of what you're sort of the base case assuming for the change in NODs and for NIW?

C. Robert Quint

Yes, Jasper, it's Bob. We -- I said that we expect a 24% decline in new defaults year-over-year. Now, January was 28%, just as a initial comparison. But that's a number we expect, and that's a number we expect to drive the incurred losses, as well as no material changes in the net roll rate assumptions.

Jasper Burch - Macquarie Research

Okay, that's helpful. And that factors in changes to HARP and sort of burn off on that?

C. Robert Quint

It factors in. Certainly, we expect HARP will continue this year, but there's not a material component of the expectation regarding HARP. But it does -- that does help the composition of the portfolio for sure.

Jasper Burch - Macquarie Research

Okay. And then, you guys spent a little bit of time talking about the competitive landscape and sort of -- to a lot of people it looks a lot like a homogenous product -- sorry. And so how do you sort of compete, other than on pricing, to really gain market share or continue to grow relative to your competitors?

Teresa Bryce Bazemore

This is Teresa, and we've been very focused on working with our customers to help them grow their business and for us to grow with them. We've been very sort of customer-focused. We've also helped with training, feedback on how the -- their portfolios are performing from a risk analytics point of view. And we believe all of that has sort of enhanced the relationship. S.A.'s talked in the past about our training. We believe that that's another thing that adds value in terms of the customer, as well as improving the portfolio of business that we're seeing from them. So we believe that that, along with the increase in the number of customers that we're working with, positions us well going forward.

Jasper Burch - Macquarie Research

Okay. That's helpful. And then just lastly, S.A., you mentioned the transition from really a refi-driven market to more purchase volumes, at least relative in terms of issuance. I was wondering, is there a real difference in terms of the profitability of writing, either refi versus purchase volume in terms of either the premiums or, I guess, the persistency on the book or just the returns you would expect?

Sanford A. Ibrahim

On the surface, the profitability per product is very similar, but when you take into consideration that the purchase business typically has a larger component of monthlies versus single, the composition should yield higher profitability.

Operator

Next we'll hear from Jordon Hymowitz with Philadelphia Financial.

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

Two quick things because most of them have been answered. First of all, you talked a 15% return on equity. If we're sitting here 2 years from now and you get the DTA back, you have equity only about $14, and then you'd be making about a $2 number on that. Is that mathematically correct, not predicting you're going to make that or not, but is that the way to think about it?

C. Robert Quint

You can certainly arrive at those numbers based on the trajectory of earned premiums and then down to a normalized loss level. So you can get there but certainly, we're not providing those projections.

Operator

We'll hear next from the line of Geoffrey Dunn with Dowling & Partners.

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

First question, just technical. For your consolidated risk-to-capital, does that include CMAC or just the Radian Guaranty umbrella?

C. Robert Quint

All of the MI companies, so yes.

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

And then Bob, can you help us think about your paid claim guidance. Basically, it's another year of kind of flat outgoing cash flow. Can you add some color to that with respect to Freddie's directive to clean out your pending claim inventory? And in a multi-year scenario, are we basically looking at several years of billion dollar kind of claim payments to clean out the inventory, and really no acceleration at this point?

C. Robert Quint

Yes, I mean, I think certainly, the component of the Freddie agreement is taken into account in our projections. And I would say claims paid will be elevated for the next several years. We do expect them to come down a little bit next year, and probably thereafter, but still remain elevated because of the prolonged timeframe, everything that we know about.

Geoffrey M. Dunn - Dowling & Partners Securities, LLC

So you're looking at more, "we've already reached peak on outgoing claim payments" versus down the road, a pick up or sustaining these levels?

C. Robert Quint

Yes. We think 2011 was the peak, and we think they're going to remain elevated. So they may not come down very quickly, but we don't think they're going to go up.

Operator

We'll hear next from the line of Jack Micenko, I believe, with SIG.

Jack Micenko - Susquehanna Financial Group, LLLP, Research Division

I wanted to talk first about the mix of single and monthly. I think you're down about 65-35. Where could that mix ratio go to in a more robust purchase market with the FHA increases continuing? Where was that back in sort of prior points in the cycle where you sort of switched over to purchase? And then how do we think about the ROE differential between single versus monthly pay?

C. Robert Quint

So, with an increase in the purchase market, certainly, the single percentage can come down, perhaps to the 20s, which is, in our minds, that's an ideal mix. The modeled ROE for monthlies is in the mid-to higher teens. The modeled ROE for singles is in the area of low double digits. But remember, that's based on assumptions and based on a duration assumption, that if its longer, it's going to be better for the monthlies and not as good for the singles. If it's shorter, it's going to get better for the singles and vice versa. But we look at the mix combined, and we say that if it's a little bit longer than our expectations overall, the book is going to be better because we're still writing more monthlies. So we'll -- we like the mix. We'd like it to be a little bit lower than the current mix of singles, and we expect that, that will happen as the purchase market picks up.

Jack Micenko - Susquehanna Financial Group, LLLP, Research Division

Okay. And then on the denial reinstatements, I mean, can you show us what's potentially happening there? Is there something on the servicing side that's more sort of industry-wide? Is it a single servicer anywhere tied to some of the recent settlement completion of the foreclosure of yours?

H. Scott Theobald

This is Scott. It's probably not related to anything like that, but we have been working with our servicers to identify efficiencies and processing reinstatement requests. The goal is to either -- quickly, it's either finalizing denial or reinstating the claim. So it's more about getting things done sooner.

Operator

Next, we'll hear from the line of Matthew Dodson with JWest.

Matthew Dodson

You guys have done a great job with your risk-to-capital ratio, and you've also done a great job with the capital. Can you talk a little bit about if you take out the 13 that you have due and then the 55 that you have left, you have about 200 at the holding company. And I mean, that looks like you guys have made it to the other side, so how do you think about potentially raising capital again at the holding company? And how should we think about that?

Sanford A. Ibrahim

Clearly, we believe that capital liquidity have been a critical factor for us, and we also believe that financial strength will continue to be an important differentiator going forward. Therefore, we've been, and we'll continue to evaluate opportunities for improving our capital and liquidity positions on terms that are favorable and acceptable to us.

Operator

Next we'll hear from the line of Bose George with KBW.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Actually, first a political question. It looks like the GSE first loss resharing product is probably going to happen fairly soon. I was just curious if that's a market that you guys could potentially participate in.

Teresa Bryce Bazemore

This is Teresa. There continues to be a lot of discussion around that, as well as kind of whether there would be more movement on sort of the FHFA, talking about deeper MI coverage. But right now, that seems to not be moving forward at the moment. So we don't really know what the timing is going to be in that regard. We continue to have discussions about how we can participate in the strategic plan that the FHFA has.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

And then just, next question, you'd noted earlier that you expect 2013 NIW to be higher than 2012. Do you have an expectation for growth in insurance in force by either yourself or the industry?

Teresa Bryce Bazemore

I think at this point, we don't have an estimate that we could share with you. But I think we do expect a couple of things. One is we expect the penetration for the MI product to be up, because particularly the growth in purchase transactions that we're expecting, as well as the FHA announcements. They have a price increase coming in April. And they're also planning in June to eliminate their cancellation of MI premium going forward. And we think those things will both help the MI, private MI industry, write more business. So we think at the end of the day, that will help with kind of the growth of NIW in 2013. And we feel good about sort of where January ended in that regard.

Operator

And we will hear next from the line of Steve Stelmach with FBR.

Steve Stelmach - FBR Capital Markets & Co., Research Division

Just a follow-up, I think, it's probably for Teresa. HUD put up their disparate impact language I think on Friday. One, are you guys subject to disparate impact? And two, if not, and disparate impact sort of complicates lenders' abilities for the risk-based price, does that create an opportunity for mortgage insurance?

Teresa Bryce Bazemore

Steve, we're sort of just looking at that, just in the way that you are. We are certainly subject to HUD's views on disparate impact. So I don't know whether I can comment at this point about whether that creates any opportunity for us. But we certainly will be looking closely at that.

Steve Stelmach - FBR Capital Markets & Co., Research Division

It's certainly not a negative, but neutral to maybe, possibly, positive. Is that the right characterization you would sort of give to that?

Teresa Bryce Bazemore

I don't think I can characterize it any way at this point. But I would say that we've always been subject to the fair lending guidance of HUD, and so it's something that we always had an eye to. So if anything, we'll be looking to see if that -- this changes anything going forward, or gives us any opportunity going forward. But I can't say that we know that at this point.

Operator

And our final question today will come from the line of Jordon Hymowitz with Philadelphia Financial.

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

Sorry, one more follow up question, please. The AGO ruling last week against Flagstar, I know that was nonagency, primarily, but it is also a precedent setting, I'm just wondering, if that is reaffirmed on appeal, do judgments like that -- are they factored into your rescission guidance at this point?

Sanford A. Ibrahim

We have always said in the past with similar kinds of actions, taken by financial guarantors, that really, it's apples and oranges when you compare their remedies and their contracts versus our remedies and our contracts. Our process is looking at loan by loan, getting a claim, determining whether it was underwritten properly or fraudulently or serviced properly, and doing what we have been doing.

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

I understand, but they also endure statistical sampling in his ruling. So that's a little bit different. But you still have a little bit of nonagency, if I'm correct. But independent of that, wouldn't it make it easier if there's an increasing move towards accepting denials and rescissions? Wouldn't that even give you more impetus to look or there's more of a process going forward to make these guys re-look at look at some of the things that have been sent to you over time?

Sanford A. Ibrahim

All I can say is we look at all of those decisions and evaluate them against our -- what we are doing. But we also understand that our business and our relationship with our servicers and lenders is on a different contractual basis.

Operator

And I'd like to turn the conference over -- back over to S.A. Ibrahim. Go ahead, please.

Sanford A. Ibrahim

Well, I'd like to thank everybody for participating in our call and for the robust questions. And with that, I'd like to conclude the call for this quarter. Thanks.

Operator

Thank you very much. And as you heard, ladies and gentlemen, that concludes our conference today. We appreciate your participation and your using AT&T Executive Teleconference. And you may now disconnect.

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